Direct benefits:

Savings in amount of taxes paid

Are you aware about the amount of taxes you are paying today?

Many of us feel that income tax is the only/major tax people have to pay, but that is a big misconception. There are indirect taxes on most of the commodities that we use/consume daily, including things as match box to clothes, tooth paste, petrol, diesel, electricity, mobiles etc.

Let's consider different cases and their potential tax burden in current system

Here we have considered 20% of the expenditure amount as Indirect taxes, because most of the commodities have taxes included in their prices - ranging from 10% to 40%, so we have conservatively considered an average of 20% tax component in the prices.

More shocking is the fact that even for poor people (annual income Rs. 1 lac or below) or the so-called tax exempt farmers, the indirect taxes are significant, as one can see from the case 1 in the table above.

Here is the case by case comparison of the current tax applicability and the tax people will have to pay after the implementation of the Arthakranti proposal.

For case 1:

For case 2:

For case 3:

Here indirect taxes post-Arthakranti are considered to be 10% of expenditure amount, which are on higher side. (Actual will vary from 2% to 10%, on most of the commodities.)

No tax returns & No tax compliance costs

Since Arthakranti's bank transaction tax (AK-BTT) will be deducted automatically by banks, citizens don't need to take any other efforts for tax payments.

Today tax returns are required becuase the current tax system is declarative, i.e. people have to declare what is their income and how much of taxes they have paid. With arthakranti because tax deduction is automatic, filing tax returns will NOT be needed at all.

For businesses tax compliance is a BIG overhead today because of the complex and declarative taxation system.For small and medium scale businesses, the tax compliance is so burdensome that some of these businesses become uncompetitive and hence tend to avoid the taxes as much as possible.

With AK-BTT, tax compliance burden will be completely removed.

For businesses, they will be freed of the need for tax manipulations, and hence their creative energy can be better utilized for value addition to their products or services.

Adequate tax revenue for each level of Government (Center, State and Local)

We have seen that individual's tax applicability is going to reduce significantly for almost everyone, then the obvious question is will Government's revenue also reduce with Arthakranti?

The point is that though the individual's tax applicability is going to reduce, the number of tax payers and their compliance is going to increase significantly.

Tax base will widen, with a gentle pinch of bank transaction tax and that will fetch adequate revenue for each of the three levels of government.

There are different methods to estimate the required rate for AK-BTT. These methods

Differ in the way the tax base (taxable transactions) is estimated.

But are identical in the required revenue estimation -- current tax revenues (central, state and local government bodies) and the known revenue deficit.

BTT rates required to generate revenue equivalent to tax revenue generated by existing tax system are given in following Table 1 below

We have not considered here the inevitable increase in bank transactions as a result of the withdrawal of higher denomination currency (Highest denomination note being Rs. 50). “Mobile payments in India”, a reportby Deloitte in association with ASSOCHAM, highlights the huge size of the cash economy as follows

“However, India remains predominantly a cash economy due to high prevalence of cash in day-to-day transactions. Overall, 67% of transactions are carried out in cash, while only 33% are done through electronic means.”

This implies that the actual transactions in banks, post ArthaKranti BTT Proposal implementation would be substantially greater and thus the effective revenue neutral BTT rate could be lower.

Transparency in the Economy

With removal of high denomination currency notes (say Rs. 100 & above), with removal of legal support for cash transactions above say Rs. 2000, high value cash transactions will not be practical

Secondly, with simplified, equitable and small rate tax system, the motive of tax avoidance will be removed

Transacting through banks will be more rewarding, because the registration of credit history will bring in low interest rate (as low as 5% annually) credit/loans

Banking will increase and banks will offer better services to all, because they are going to get revenue from each transaction

Combined effect of all of these will be substantial increase in bank transactions => that would bring in more and more transparency in the economy, money will be traceable

Additionally since the tax is deducted automatically at a fixed rate for all transactions, there is no "discretion and discrimination" in the taxation and hence there is increased tranparency in all monetary transactions

With more bank transactions, people will start getting loans at cheaper interest rates

Due to lack of adequate credit supply and the absence of credit history, today loans in our country are costly (10% to 16% annual rate of interest), if you get it from banks. If one borrows from the private lenders (true for everyone who do not use banks, especially the poor and the needy), the rate is even higher, sometimes 120% to 3600% annually!

With the implementation of the Arthakranti proposal, there would be a reduction in interest rates significantly as

most of the money in cash will be deposited into the banks,

government’s tax revenue will be adequate (hence no internal borrowings) and

banks will get fees on every transaction

We believe that the credit policy will not be as hard as it is today. As a result noone will have to suffer the current challenges of large set of supporting documentations required to procure a loan.

Only those who have good credit history will get cheaper loans from the banks!!…and for different purposes like education, farming, business, housing etc

Let's try to see its impact on home loans and its EMI

In current system, minimum rate of interest for home loan is 10%

With Arthakranti, the rate of interest will come down to 4% to 5% and then let's see its impact on the home loan EMI, as well as on the amount of interest payable

We can see that the EMI reduces 2/3 i.e. from 24,119 to 16,504 and the interest amount reduces from Rs. 32 lacs to Rs. 14 lacs only

One can also look at it in a way that with reduction of rate of interest from 10% to 5%, if we keep the EMI amount same, the loan can get completely repaid in 2/3 of the time i.e. In this case in 13 years itself!

Terrorist and anti-national activities can be controlled

There is a large informal sector in India today. It exists, partially as a response to the regressive tax system, as well as due to the extreme shortage of money supply. It is aided and abetted by the presence of the cash economy.

All of this is a fertile breeding ground for the activities of anti-social and anti-national activities.

Even the Task Force for implementation of FRBM Act acknowledges this reality in its comments related to the construction and real estate industry.

By removing the tax evasion related black money and high denomination notes (thus effectively blocking the circulation of Fake Currency Notes) the instruments commonly used to finance anti-social and anti-national activities are blocked.

A similar effect was noticed in the USA when President Nixon withdrew all notes having a denomination higher than one hundred dollars.

UK is actively moving towards a cashless economy primarily to counter the use of cash as an untraceable mechanism to sponsor/fund terrorist activities.

The use of high denomination Euro notes as a tool for tax evasion has become visible in the on-going Euro sovereign-debt crisis.

Post implementation of the ArthaKranti BTT Proposal the current informal economy could substantially merge with the formal economy. Hence the abuse of the informal economy by anti-social and anti-national elements can thus be effectively checked.

Social security wherever needed

Focus shift for business from tax manipulation to Innovation

Indian business will become globally competitive

All existing taxes are replaced by a single transaction tax on banking transactions.

High denomination currency (say above Rs.50) is abolished.

A legal provision is made to restrict cash transactions to say, Rs.2000.

All existing high denomination currency gets deposited in the banking system and a transaction tax is deducted on it.

Withdrawal of high denomination currency and a cap on cash transaction amount render high value cash transactions unviable. This will direct most transactions through the banking system. As the total banking transactions grow, a tax will be collected on each transaction and there will be a multifold rise in government revenue at all levels.

Money used for all day-to-day transactions is termed M1 or Narrow money. This is nothing but the sum of all currency in circulation and all derivative deposits that is, bank money created through credit expansion.

We have an M1 of Rs. 11, 00,000 crores for 2008-09. Now look at the left hand column in the chart. It shows the total revenue of the Centre and States for 2008-09, and we see its composition as a sum of revenue receipts and capital receipts, amounting to Rs.16, 46,000 Crores. Out of this, revenue receipts are about 10, 17, 000 crores.

After implementation of our proposal, all high denomination currency which makes up 90 % of our value would be deposited into banks as primary deposits. Thereafter, this money would be ‘white’ in every sense of the word. Moreover, the old taxation system would have been replaced by the simple and almost negligible transaction tax. Since there would be no reason or incentive to evade, the money would start moving freely within the system – for consumption, investment or into savings. Whatever the purpose, every transaction would generate a transaction tax.

Assuming that only twenty percent of this money moves once every day, the revenue generated over a year for Centre and States combined would be Rs. 10,44,000 Crores plus import duties, as against the Rs. 10, 17, 000 Crores all inclusive yielded by the existing system.

By the same logic, the revenue yield for a transaction ratio of 40% would be Rs.20, 88, 000 Cr., for a ratio of 60% would be Rs. 31, 32, 000 Cr. And for 80% it would be Rs. 41, 76,000 Crores! These estimates of revenue are extremely conservative as well, since they have been made using the M1 as a fixed number, whereas M1 is essentially a dynamically changing number. As the primary deposits start moving, they will start creating derivative deposits and this will send total M1 upwards with every transaction!

What this means is that the notional tax rate of 2% may not be required – the actual tax rate to fulfill our needs could be lesser than 1% or even 0.5%!

Take a look at these figures for the Mumbai Municipal Corporation –

The actual Cheque clearances in Mumbai region in 2007-08 amounted to Rs. 36, 85, 400 Crores. Share of the local government at the rate of 0.35% as proposed would generate a revenue for Mumbai Municipal Corporation to the tune of Rs.13,000 Crores, as compared to 8,550 Cr. collected by the present system through dozens of taxes, duties and octroi.

It is therefore obvious that by shifting the tax base from entities and goods and services to banking transactions, it is possible to generate a tremendous amount of revenue, without stressing out the tax payer. This is no miracle – it is sheer arithmetic. All we are doing is shifting and increasing the tax base exponentially - thereby reducing overall incidence of tax on the citizen.

The government has abundant funds and the leaking taxation system has been repaired.

Government debts are repaid on priority. The Fiscal deficit is history. These two factors will empower the Government dramatically and we shall see massive changes coming in. Overhaul of the taxation system will simplify collection of revenue beyond imagination. This is already a proven fact – in the last financial year, the Government collected almost Rs. 9,000 Crores without any paper work and hassles through the Securities Transaction Tax alone. Collecting that much money through the other taxes would entail back breaking paperwork, wouldn’t it?

This ease of collecting revenue will practically finish all opportunity for corruption and merge the parallel economy with the formal one. All black money will become white and remain white. There will be no incentive for generation of black money thereafter.

This will have a direct and immediate impact on all anti-social and anti-national elements. Their purchasing power will be destroyed forever and all subsequent movements will become traceable through the banking system. The menace of fake currency will be brought to an end once and for all. All this will effectively paralyze enemies of society and the nation and the process of restoration of social security will begin.